The April 2006 Senior Loan Officer Opinion Survey on Bank Lending Practices addressed changes in the supply of, and demand for, bank loans to businesses and households over the past three months. The survey also contained a set of special questions on the minimum required payment on outstanding credit card balances of individuals and households. This article is based on responses from fifty-seven domestic banks and nineteen foreign banking institutions.

In the April survey, domestic commercial banks reported a further net easing of lending standards and terms for commercial and industrial (C&I) loans, while lending standards on commercial real estate loans reportedly were unchanged. At U.S. branches and agencies of foreign banks, lending standards on both C&I and commercial real estate loans were little changed, on net, but like their domestic counterparts, foreign institutions reported a net easing of terms on C&I loans. Demand for both C&I and commercial real estate loans at domestic banks had changed little over the previous three months. By contrast, foreign institutions experienced, on balance, weaker demand for both C&I and commercial real estate loans over the same period. In the household sector, credit standards on residential mortgages and consumer loans were little changed, on net, during the survey period. A moderate net fraction of domestic respondents reported weaker demand for mortgages to purchase homes, while a larger net fraction saw weaker demand for consumer loans over the past three months.

C&I Lending(Table 1, questions 1-6; Table 2, questions 1-6)

In the April survey, domestic banks indicated that they had further eased credit standards and terms on C&I loans over the past three months. On net, 12 percent of domestic institutions indicated that they had eased standards on business loans to large and middle-market firms, roughly the same net percentage as in the January survey. About 60 percent of domestic respondents?a notably larger net fraction than in the previous survey?reported that they had trimmed spreads of loan rates over their cost of funds for such firms. Almost 40 percent of domestic institutions?again a larger net fraction than in the January survey?indicated that they had reduced the costs of credit lines over the past three months. About one-fifth of domestic banks, on balance, noted that they had increased the maximum maturity of C&I loans or credit lines that they were willing to extend to their business borrowers.

For C&I loans to small firms, 7 percent of domestic respondents, on net, noted that they had eased lending standards in the April survey. On balance, almost 50 percent of respondents indicated that they had narrowed spreads of loan rates over their cost of funds, and about 30 percent of them reported having reduced the cost of credit lines over the same period.

As they did in the previous two surveys, U.S. branches and agencies of foreign banks reported essentially no change in their credit standards on C&I loans over the survey period. Nonetheless, significant net fractions of these institutions noted that they had narrowed spreads of loan rates over their cost of funds and reduced the cost of credit lines.

Nearly all domestic respondents that reported an easing of their lending standards or terms on C&I loans in the April survey pointed to more-aggressive competition from other banks or nonbank lenders as an important reason for having done so. Significant net percentages also cited increased liquidity in the secondary market for these loans and increased tolerance for risk as reasons for their move toward a more accommodative lending posture.

On balance, demand for C&I loans from both large and middle-market firms and small firms was reportedly little changed in the April survey at domestic institutions. By contrast, 16 percent of foreign respondents, on balance, noted that they had experienced weaker demand for C&I loans over the previous three months. Among domestic respondents that experienced stronger demand for C&I loans, all cited borrowers' increased needs to finance investment in plant or equipment, while three-quarters pointed to increased needs to finance mergers and acquisitions as reasons for the pickup in demand. Among domestic institutions that experienced weaker demand for C&I loans, 90 percent indicated that customers' internally generated funds had increased, a pattern of responses consistent with continued strong corporate profitability. Nonetheless, 60 percent of these banks also pointed to borrowers' decreased needs to finance investment in plant or equipment as a reason for weaker loan demand. Regarding future business, about 10 percent of both domestic and foreign institutions, on balance, indicated that the number of inquiries from potential business borrowers had increased over the previous three months.

Domestic institutions reported essentially no change in their lending standards on commercial real estate loans, on balance, over the past three months. Similarly, a large majority of foreign respondents indicated that they had not changed standards on such loans. On net, just 5 percent of domestic banks saw an increase in demand for commercial real estate loans over the past three months, about the same net fraction as in the January survey. By contrast, about one-fourth of foreign institutions reported that demand for this type of loan was weaker over the same period.

Lending to Households(Table 1, questions 9-23)

On net, about 10 percent of domestic institutions noted that they had eased credit standards on residential mortgage loans over the past three months. Almost one-fourth of domestic banks experienced weaker demand for mortgages to purchase homes, but this net fraction was considerably smaller than in the January survey.

About 15 percent of domestic respondents reported an increased willingness to make consumer installment loans over the past three months. Standards and most terms on credit card and non-credit-card consumer loans were reportedly little changed, on net, in the April survey. However, for the second consecutive survey, one-quarter of respondents indicated that they had increased the minimum percent of outstanding credit card balances required to be repaid each month. Demand for consumer loans reportedly weakened further over the past three months: More than one-fourth of domestic banks, on net, saw weaker demand for such loans, about the same net fraction as in the previous survey.

To help the Federal Reserve improve its estimate of the financial obligations ratio in the household sector, the current survey contained a set of special questions regarding minimum required payments on the credit card balances of individuals and households.1 There were twenty-nine responses to these special questions from domestic institutions.2 About three-quarters of these respondents indicated that the minimum required payment is calculated simply as a percentage of total outstanding balances. For banks that calculate the minimum required payment in such a manner, responses regarding the size of this percentage varied notably. About 75 percent indicated that this percentage was more than 1.5 percent but less than or equal to 3.0 percent of total outstanding balances, with about 30 percent close to the high end of this range.

Institutions that do not calculate the minimum required payment on credit card balances simply as a percentage of total outstanding balances were asked to estimate the portion of such minimum required payment attributable to fees, finance charges, and repayment of principal. Three-quarters of these respondents indicated that the approximate ratio of fees required to be paid to total outstanding balances was less than or equal to 0.20 percentwith the remainder reporting higher ratios. Regarding the ratio of finance charges required to be paid to total outstanding balances, all but one financial institution reported that this ratio was more than 0.50 percent but less than or equal to 1.50 percent. Finally, three-quarters of respondent banks indicated that the ratio of principal balances required to be paid to total outstanding balances at their institution was more than 0.5 percent but less than or equal to 1.5 percent, with the remainder reporting higher ratios.

Banks were also asked to report what fraction of individuals and households paid only the minimum required amount on their outstanding credit card balances in recent months. About 70 percent of respondents noted that 15 percent or less of their customers paid the minimum required amount last month. The banks indicated that a similar percentage of individuals and households paid the minimum required amount in each of the past three months. Finally, one-third of respondents, on net, indicated that they had increased their minimum required payment on credit card balances of individuals and households over the past year.

1The financial obligations ratio is an estimate of the ratio of debt payments and other regularly occurring financial obligationssuch as automobile lease payments, rental payments on tenant-occupied property, homeowners' insurance, and property tax paymentsto disposable personal income. For more information about the financial obligations ratio, see www.federalreserve.gov/releases/housedebt/default.htm. The last time banks were queried about minimum required payments on outstanding balances for credit cards was in the January 1999 Senior Loan Officer Opinion Survey.

2 According to the December 31, 2005, Call Report, these banks accounted for almost 40 percent of credit card loans on the books of domestic banks.

This document was prepared by Fabio Natalucci and Gretchen Weinbach with the research assistance of Arshia Burney and Jason Grimm, Division of Monetary Affairs, Board of Governors of the Federal Reserve System.